Supply Crisis Part Two

RECYCLING IS FACING A PROBLEM it has never seen before. Prices for some recyclables, especially paper, have enjoyed a bull market for well over a year. As recycling markets expert Jerry Powell notes, what is unusual about this market situation is that we have enjoyed strong, steady price growth. Paper markets are so good that my wife's elementary school collects old newspapers and uses the proceeds to help pay for student field trips. What better example of strong markets do you need?

Of course, we've had market spikes before — the skyrocketing prices in 1995 followed by the 1996 collapse comes to mind. But we've never had anything like this — a market expansion that just keeps going. The reason for this good news is simple: China.

That country is a poster child for the ill effects of deforestation. China produces little of its own paper pulp and instead relies on the recycling bins of other countries to be its forests. China's increased market power is no surprise. For years, recycling experts have been predicting the rise of the Chinese economy and its impact on recycling. I remember a presentation 10 years ago in which Dan Cotter, a California-based paper broker, spelled out how the Chinese would become key players in the American recycling market. The future is here.

High recycling prices are great news for local governments and haulers with curbside recycling programs. They finally have some revenues to show for all the money they have put into recycling. However, high prices are terrible news for American paper mills and other recycling industries that compete with overseas mills for raw materials because those mills can outbid them.

Some people think American companies should just pay more for recyclables, but there's one little problem. End markets cannot pay a price for recyclables that is too high in relation to virgin raw material costs. If they do, they could end up driving the price of their end product beyond what users are willing to pay. That's not a prescription for success.

The glass industry provides a good example of what happens when industries pay too much. In the late 1980s, the largest glass bottle company in America wanted to push glass recycling, so it aggressively subsidized the price it paid for old bottles. At the time, the company was paying $60 per ton when the real-world value for clear bottles was half that and the value of brown and green was even less. Of course, the subsidy didn't last. It couldn't. And when it was withdrawn, the glass recycling rate began to slide.

Good markets don't last forever. Sooner or later, the Chinese economy will suffer a downturn. Or the yuan will be uncoupled from the dollar and will be allowed to rise in value, raising the price of Chinese goods on the world market. Or, Chinese labor unions will overcome government repression and achieve higher wages and better working conditions for their members.

We will always have a disconnect between collectors and end markets. While we want a win-win for both sides, the reality is simple. High prices for collectors are bad news for end markets. Low prices from end markets are bad news for collectors. Rising pulp prices are good for both. Local governments and haulers will always need to charge for recycling services, but at least for now, we can sit back and enjoy steady high prices for our recyclables.

Opinions in this column do not necessarily reflect those of the National Solid Wastes Management Association or the Environmental Industry Associations. E-mail the author at: [email protected].

The columnist is state programs director for the Environmental Industry Associations, Washington, D.C.